RITES Limited (RITES) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the RITES Limited 3Q FY '20 Post Results Conference Call hosted by SBICAP Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Santosh Hiredesai from SBICAP Securities. Thank you, and over to you, sir.

Thanks, Hamman. On behalf of SBICAP Securities, I would like to extend a warm welcome to all the participants who have dialed in today for the call. I also take this opportunity to thank the management of RITES for giving us this opportunity to host them to investors and analysts. To discuss the 3Q and 9 months fiscal '20 numbers and also share with us the outlook, we have the management of RITES represented by Shri Rajeev Mehrotra, Chairman and Managing Director; Shri BP Nayak, Director of Finance; Shri Parmod Narang, Chief Financial Officer and the team of Investor Relations. I now hand over the call to the management for their opening remarks, followed by a question and answer. Over to you, sir.

Thank you. Good afternoon to all of you. I am Rajeev Mehrotra, CMD of RITES Limited. And with me, I have our Director of Finance, Mr. BP Nayak; CFO, Mr. Narang; and team from Investor Relations group. RITES Limited is a Mini Ratna category-I Schedule A Public Sector Enterprise and a leading player in the transport, consultancy and engineering sector in India, selling diversified services and geographical reach. RITES Limited is the only export arm of Indian Railways for providing rolling stock overseas other than to Thailand, Malaysia and Indonesia. Now I'm going to talk about the highlights of company's results of Q3 FY '20 and 9 months FY '20, and then we can open the floor for questions and answers. Since almost 97%, 96% of our revenue is from stand-alone business, so we'll just give the consolidated number, which are almost closest to the stand-alone numbers. And the stand-alone numbers are already available in the presentation we have uploaded yesterday on the website. If that is fine, I'll just go through the consolidated numbers. The company's total revenue on a consolidated basis has grown to INR 663 crores as against INR 583 crores in third quarter of FY '20, registering a growth of 13.9%, Y-o-Y basis. Company's revenue from operations has also grown by 15.9% to the INR 620 crores from INR 535 crores in Q3 FY '20. This is excluding other income, so this is pure operations income. Operating profit of the company for the quarter has increased by 8.1% and stands at INR 157 crores against INR 135 crores in Q3 FY '19. EBITDA and PAT have grown by 4.7% and 10.5%, respectively, and now stand at INR 14 crores and INR 150 crores, respectively. EBITDA and PAT margins stand at 32.2% and 22.6%, respectively. The earnings per share has almost doubled and stands at INR 5.86 for Q3 FY '20 as compared to INR 5.19 for Q3 FY '19. I would like to do a view on the segments. For consultancy segment, the company generated a revenue of INR 285 crores against INR 278 crores in Q3 FY '19. We have given gross margin of 46.5%. Consultancy has remained flat due to lower execution during Q2 FY '20 because of following monsoon and some of these projects not seeing the billing due in that period. Company's leasing business has showed steady growth of 14% over Q3 FY '19 and recorded income of INR 31 crores in Q3 FY '20. Leasing business margin has remained healthy at 34% during the quarter. Exports revenue during the Q3 FY '20 stands at INR 91 crore as against Q3 FY '19 export INR 101 crores. Export margins have been at 21.3%, the remaining 2 locomotives out of the 1 previous order of 10 locomotives from Sri Lanka are also being shipped this quarter. That is Q4. They're already at the port. The revenue from turnkey construction projects has reached INR 196 crores in Q3 FY '20 with increase of 72.5% over Q3 FY '19. Turkey segment gross margin stands at 3.1%. Company's consolidated order book now stands at INR 5,782 crores, INR 5,782 crores as of December 31, 2019. Gross order inflow on a stand-alone basis have remained at INR 470 crore. This order book gives us revenue, I think we think for next 2 to 2.5 years from now. I would also like to comment on 9 months of FY '20 consolidated results. The company's total revenue on a consolidated basis has grown to INR 2,120 crores as against INR 1,450 crores at FY '20 -- I'm sorry, in 9 months FY '20, registering a growth of 46.2% year-on-year basis. I will repeat this. In 9 months' passing, the total revenue has grown to INR 2,120 crores, as against INR 1,450 crores in matching period last year. Company's revenue from operations has also grown by 45.3% to INR 1,904 crores from INR 1,310 crores in the comparable period of FY '19. Operating profit of the company for the quarter has increased by 38.2% and stands at INR 464 crores. EBITDA and PAT has grown by 34.3% and 44.2%, respectively, and now stand at INR 719 crores and INR 489 crores, respectively. The earnings per share has grown by almost 47.1%, and it stands at INR 19.08 per share for 9 months of FY '20, as compared to INR 12.97 for 9 months of FY '19. With these numbers, I can say that the company is on track to achieve FY '20 targets. And now we can open the line for questions and answers. Thank you.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of [ Akshay Bosch ] from BMG Invest.

Sir, the first question is one on the order book side, I think last quarter, you said that maybe by the end of the year, you could be at INR 8,000 crore kind of a number. Any changes in your expectations? And if you could give us some color on what are the kind of projects that you are involved on, both on the export and the domestic side, that we have said there.

Okay. First, I'll touch upon the export side. We have actually been successful in one major export order. I'm giving you indicative figures because the price is still being discussed. So around INR 650 crores is the export order. And it's very significant for us because for the first time, this order is coming from a [ KBS ] country. There are about 17 [ KBS ] countries. For the first time, we are securing a coach and loco order from [ KBS ] market, and we are the only successful bidder there now. We are discussing the documents and the further formalities. Hopefully, by March, because this tender has been opened only in the first week of January. Hopefully, by March, this order should be in our hands. So INR 650 crores is important export order is already there. Now second part is, yes, I did indicate that we hope to end the year with INR 8,000 crores order book. There were 2, 3 important indicators in our mind when we said that. One was this export order, which I already discussed. Second is the inflow of turnkey contracts. If you notice the turnkey order book has not seen much increase in this quarter or the year as such. The reason is that the policy of turnkey contracts was under revision, which has been approved and modified only on 27th of December. So we would start seeing the projects under this scheme coming now onwards, February and March. I hope to see a reasonable share in that. So we still maintain the optimism, I will say, that we might actually end this by March around INR 8,000 crores. But then the entire execution would actually would fall in 2021 and beyond.

Got it, sir. Got it. Just second question is on your export revenue. Should we assume that your INR 700 crore of export order book, you should be executing in the next year of FY '21? I mean should you be able to execute all of that in FY '21?

I think majority of this would be or maybe if there is a shift of maybe 15%, 20% to next year. We intend to do at least INR 550 crores to INR 600 crores in FY '21.

Understood, sir. Understood...

Sometimes, some design changes or some changes in the composition of trains, some more [indiscernible] is required. That, from the client side, actually delays the issue. But the 2 DMUs, which are on existing design, would definitely be shipped in [indiscernible] of next year. And then there is another major order of [ 160 ] purchase on Sri Lanka, which would start by, I think, onwards, Q3 of next year onwards. A majority of this in '21. Yes.

Got it, sir. So just one last question, if I may. A couple of new ventures that are coming out. One is the station redevelopment. If you could give us some color on your participation there? And what kind of opportunity you see there? That's number one. And the second thing is this private train -- private operators are running the [indiscernible] railways on certain routes. Do you see that as an opportunity as well for you? Or that's something that you will be participating in? So maybe any color on the issue will be helpful.

Okay. On first stage development, this we have been looking at a very big opportunity area going forward. So we have, for the time being, our equity commitment to them is 24%. We have not yet given any equity payout as yet. We have given our consent that we would be willing to come up to 24% of equity or INR 48 crores to be precise. We are discussing with the other shareholders the participation agreement, et cetera. That was to position RITES in a very big expanding area and also at [ Am Plant ], see the possibility of using our engineering experts for about 400 to 600 stations, which are being planned to be taken up in first few years. So I think this is -- it's an objective of being a shareholder and also trying to see that at arm's length if you can get some engineering business. RITES has a very strong field engineering team, and I think both look opportunistic as of now. And a couple of stations you noticed are already out for bidding like Amritsar, Chandigarh, Bijwasan, Anand Vihar and 1 to 2 more. So the government has also reviewed the underlying condition for leasing of this land for station development. So I think my view on this is that this is an emerging area. And these land parcels being in the heart of the city would definitely offer many more options to any real estate developer.

Got it, sir. And on the second piece on [ credit changes ]. Any color there?

We are right now assisting the ministry on as we transition advisory for this transaction. And this will take some more time before the governments are finally -- accepting conditions are notified. Beyond the role as a transaction adviser in this, right now, we are not looking at any investment opportunity in this as such. Maybe we will see how this emerges and do we have any possibility or any way we can be associated, but nothing right now. But this, I should say that this is an interesting area because on open access first time such operations are being permitted in India. As of now, there is no investment proposal in hand or under consideration of the company.

The next question is from the line of Anupam Goswami from Pioneer Invest.

So turnkey projects, what sort of margins can we expect going forward right now? And the second question is on the -- how much are we focusing on nonrailway kind of business opportunities in the coming future? That's it.

Currently, opportunities are definitely going to be there in the railway sector, whether it's doubling, third line or electrification. And as I already said, the policy has been finalized in December. Earlier, the policy was to offer 8.5% fees on cost-plus basis, which is now put to bidding to combine the internal procurement requirements by railways. And margins, we are trying to see that we optimize the margins on the business already in hand. And if you would notice that in 3 months period -- sorry, 9 months, this is quarter 3 -- sorry, Q3, margin has been at 3.1%, which is slightly higher than the indication we had given that margins would be about 2% to 2.5%. So currently, the margins we are able to maintain at 3.1%. But your answer about going forward, since there is no upper cap, there was upper cap of 8.5%, we can build on the margin depending upon the level of difficulties in the project, the location, the remoteness, the other issues of infrastructure in reaching out to that place. So I think this actually is a better proposition than a fixed rate uniform for every location. There's nothing to worry on account of the margins in this segment going forward. And in any case, as we have said earlier also, we don't intend to become a whole hub turnkey company. It is safe to believe that maybe 25%, maybe maximum 30% revenue could be expected from this business segment.

Okay. And secondly, sir, what's your impression on nonrailway projects? And how much opportunities can we see in that segment?

Well, I think if I put 2 sectors together, the metros and take the first, a lot of metro projects are now -- have come to bidding stage. In terms of about 13 tenders are already out either for digital designing or GC work with value aggregating to INR 1,400 crores. This has been put to bidding. Already, we are participating in almost all of them. And even if we'd be there for just a reasonable portion, I think this would be a comfortable position in the metro sector opportunities. So the opportunity right now in hand is INR 1,400 crores, which is in the bidding stage. So we, at times, do alone; we, at times, do in combination with other consultants. Similarly for the airports. In recent announcement of 100 new airports, I think we are the largest consulting arm for [ Bluefield ] airports here, and we would see that to what extent we can see those opportunities, either singly or with other contractors, depending upon the level of assignment. Also look at highways, because highways also seeing a very big expansion. We will see what way we can get more an environment the highway sector spending. So besides railways, I see good opportunities in metros, airports and highway. In terms of volume. But otherwise, we are also looking at roads, inland waterways and the -- our subsidiary, RMAC has already got a mandate from a railway for renewable energy, due to the recent announcement of renewable installations around the tax, we should be able to get a reasonably good involvement there. And one more thing is that the integrated check posts, we have been working for the Ministry of Home in developing integrated check posts on the Indian land border with [ 11 ] countries. Recently, we succeeded in getting one ICP on a competition basis at [ Lebalden ] with -- on Nepal side, being funded by [ NE ]. So these projects give you a variety of our diversity. And also the opportunity which we see other than the railway sector as well.

Okay. Sir, right now, what is the mix of railway and nonrailway?

Okay, railway and nonrailway would be around, say, 60 to 7 to [indiscernible] other -- I forgot mentioned that we recently won one major highway project in Bangladesh also about INR 99 crores is -- sorry, I'm coming back to your first question, but then it's important to see yourself that the diversity of that we seek is not only added here in India, but also overseas. Now coming back to business railways, nonrailways, consultancy revenue is 62% railway, rest is other sectors of urban transport highways, urban development, airport, port, et cetera.

The next question is from the line of Kshitij Shah from B&K Securities. [Technical Difficulty]

Sir, just wanted to some outlook on direct participant... [Technical Difficulty]

Sorry, Mr. Shah your audio is breaking, we are unable to hear you.

Can he come again?

Sir, your audio is breaking, can you repeat the question, please?

Yes, is it better...

[indiscernible] sorry, could not get any.

[Operator Instructions] The next question is from the line of Harshit Kapadia from Elara Securities.

Sir, I just wanted to check with you in the budget, there was announcement on the Bangalore Suburban Railway network of INR 18,600 crores. I remember, you had mentioned a Mumbai Daily Corridor is what you were looking at. Similarly, do you anticipate anything to get from the Bangalore Suburban Railway?

No. The pre-feasibility for this project has been done by us only. And I think one of the things I have said that we are trying to get a meaningful role even in the GPR or implementation stage, and that positivity still remains. We are trying to, if we can, in any way, either through competition or nomination work as a general consultant. So this will be implemented by a company called KRI, the Karnataka Rail Infrastructure Development Company. And let us see how this progresses. But it's a very significant project and would be very good to really try. We are trying.

And what would be the opportunity size of this INR 18,600 crores for us?

Well, it's very difficult to give any comments here. But normally, such projects would see the engineering element, design and in design and supervision, anything between 4% to 7%, depending upon what type of responsibility are given to you. And maybe more than 1 consultant also will join.

Okay. And any update on the Mumbai-Delhi Corridor, sir?

Yes. We are optimistic about it. It's a very challenging project. No decision is taken as yet on this. We are hopeful that we will have some growth there as well.

Okay, okay. Second thing, sir, you highlighted in Q2 con call that you will be doing some CapEx of INR 70 crores for this year with leasing locomotives, buying some land that you will be looking at for factory -- sorry, for offices. Can you highlight what is the CapEx number for this year? Is it INR 70 crores? Or are you looking at any additional CapEx?

No, this -- we are trying to stick to INR 70 crore only. We were trying a combination of either new locomotives or a lot of in-service locomotives are now available from vendors. So actually, we -- instead of new, we are trying to get in-service locomotives, which actually would be a value proposition and looking at the fact that they are reducing their use of development model. So we are right now looking at buying from instead from railways, in-service locomotives.

So would this also reduce your CapEx requirement as well if you are looking at in-service locos?

This might actually go down by almost 30%, 40%. But also -- 30%, 40% of what we invest -- or maybe 50% also.

And so what is the position of working capital cycle at this point in time, sir, for you guys?

An important payout in seeing the life cycle right now is dividend and dividend tax. If you look at December number, December, we had cash of INR 1,291. Against that dividend cost and second, Board has announced another dividend of INR 4 per share. We've intended INR 1 crore liability towards that. And rest is locomotive CapEx or working capital, INR 400 crores, some software, office equipment, et cetera, INR 36 crores and some maybe given for employees towards retiring, INR 40 crores. Roughly against 1,291, plan or commitment available for 1,177. Roughly, you can say INR 120 crores also would only be cash and benefits.

Got you. And how were the receivables, sir? Are they stretched in this very challenging business environment at this point in time? Or you are receiving increment across your client times?

No, actually, the receivable recovery time is this quarter only. So we are working on the -- so the balance sheet has not been put for the quarter how should we ever we are doing. It's -- have to believe that we hope to maintain the receivables at the end of March. And earlier, I had indicated that there's one major receivable from consumer tax. A part of this is being released very soon. So I think we'd reserve this for detailed explanation with March numbers.

The next question is from the line of [ Rahsrovit Natragen ] from [ Antique Store ] [indiscernible].

Sir, you hinted that in [ 6.5 billion ] export orders you're about to finalize, and that will be concluded in the March. Sir, could you throw some color on the margin profile of that export order, how would it look like? Because we are seeing, even in the current order backlog, there are volatility in the margins that you book. So what should be the margin assumption? And then will the revenue start kicking in from this particular new incremental export order?

In my specific question, let us not discuss margin on this particular order in public domain because then it has impact on the accretion and future margins quoting. There is already an indication given that exports would typically 15% to 25% range depending upon the level of changes, design changes or completion of [ R&D plate ]. So what I suggest is that as this quarter is still under concluding stages, we do not talk about the margins of this, in particular or in general indication, I have already given you.

Okay. I understand your constraints. Sir, moving on to the Construction segment. We are expecting maybe close to 15 plus billion of order in the remaining months to conclude in FY '20. Even if such as you move in a good portion over there, when will the construction begin? Where I'm coming from is that if I look at FY '21 numbers, if these export orders don't conclude and even if the construction orders that incrementally you win, that may not contribute significantly to FY '21. So are we staring at a flattish growth in FY '22?

No, no. I don't know. If you look at the order book of INR 5,700 crores, there is enough to keep us busy in FY '21 also. This new order of exports, even if it is time to by March because in several countries, these orders actually go up to their, I guess, maybe indicates [indiscernible] also. So it may take a month extra here and there. But even then, even if it happens, say, in April, a few initial 3, 4 months would be actually spent, including the design and first prototype goes, and then based on that, the remaining shipments happen. So effectively, what order we are talking exports today should see shipments not before March of the year.

Okay. And in terms of construction, let's assume even if you win a good -- what is the order inflow assumption that you have for construction business? And when do you expect that to start kicking into the revenue?

Currently, right now, we have INR 2,200 crores in hand already. So the activity in '21 would definitely be driven by execution of this. If we get, say, maybe it would be safe to believe that out of estimated pipeline is about INR 24,000 crores of project is likely to be -- the expenditure portion on tape, not the project value. Maybe if you get by 10%, 12%. So safe to believe maybe INR 1,500 crores to INR 2,000 crores seems to be reasonable. But then this would again be depending upon the bidding. But we are targeting that we should get around INR 1,500 crores to INR 2,000 crores. And based on this, I had indicated the order book might actually end at INR 8,000 crores as of FY '20 end.

Okay, sir. And in terms of the turnkey part, you said that this got approved, the new policy got approved and notified in the last phase of December. And so if I understand it correctly, what is the current prequalification that we have in terms of winning the turnkey contracts? Because currently, if I look at the situation in [indiscernible] probably are better place to win the big-ticket orders. Are we confined to smaller ticket orders? Or how is the strategy going ahead in this particular space?

Well, I think this is a bit too early to accept any sort of levels within this. But yes, if you are comparing with RVNL, their whole time -- actually, the whole job is on turnkey jobs. So we are not looking at the sizes in which RVNL would have been looking. Our indication, I have already given you that out of likely plays of INR 24,000 crores, INR 25,000 crores of expenditure in next year, it's safe to be INR 1,500 crores to INR 2,000 crores order book. And we are targeting around INR 400 crores to INR 500 crores of electrification, and some INR 300 crores doubling line in some particular regions.

So initially, I said we will not be a whole of the turnkey execution company, but we would definitely like to keep around 25%, 20%, 30% in the turnkey portfolio also and that -- it's incrementally.

The next question is from the line of [ Pankush Povre] [indiscernible] from Axis Securities.

Congratulations on an excellent set of results. Sir, just in one of your remarks, you mentioned that it goes slower next year in execution. Did I hear right? And what you would want to convey regarding in that?

Did I say that we were slow on the execution? I think there's absolutely a serious communication debt, our execution should go as fast as possible.

My mistake. My mistake, sir.

No, if you understood, like what I was trying to say that with turnkey execution, we already have an opening order book of, say, [ INR 22 crores, INR 64 crores ] as of 1st January. So assuming 10% of this is done in last quarter, still there is a [ big 30 order ] in any case, which has to be executed definitely significantly next year. So there's no question of slowdown if there's -- no, no, I can never commit that.

My mistake. So just wanted to understand, you have around INR 4,200-odd crores or INR 5,200-odd crores -- INR 5,700 crores, sorry, INR 5,800 crores of order book. What is the life of this? And what was the gross order inflows for this quarter? And lastly, you -- in the last question, you mentioned, we will be targeting some turnkey projects and the numbers you had given. Can you please just repeat those numbers? .

Okay. INR 5,782 crores we said is the order book. I also indicated that almost strong in the pipeline is in export orders of about INR 350 crores. Now beyond this, it was a major portion would be now turnkey because turnkey orders would start flowing some time in March only. So we are targeting that we should be able to ticket around INR 1,500 crores to INR 2,000 crores of new orders on the turnkey segment also.

INR 1,500 crores to INR 2,000 crores.

INR 2,000 crores. Now you also asked about the net order inflow in Q3. INR 470 crores net inflow. And the consulting order book has gone up, actually. We might like to take note of this. The consulting order book has gone up.

Okay. Which is high margin, right?

Yes, yes, yes.

And what would be the life of these projects, INR 5,800 crores? By when we will be completing it?

It's very difficult to give you a number.

Just ballpark.

So ballpark, say, 2 year, 2.5 years. Something will move fast, like exports would actually be set out in about 12 months or maybe 13 months. And did the new turnkey contracts will take first 3 to 4 months to get the design clearances, then another 3 months for bidding. Any turnkey which I get now would actually start looking at revenue from 7 to 8 months onwards.

Okay. And additional order book which you are targeting, which looks like turnkeys of [ INR 300 crores to INR 22,000 crore ], exports and others.

Other smaller contents in the inflow because we report only significant orders separately. Let's keep adding a lot of smaller contracts like INR 13 crores, that is actually netting as a routine. But comfortable position appears as of now. And the best effort is going to be for the turnkey part now because that is on bidding. And the export of INR 650 crore, I already said that we are almost certain. It may be March, it maybe April depending upon how the client moves.

So that would take our order book to INR 8,000 crores. So anything beyond that?

No, nothing beyond that. Let me first try to manage the March and then the top next 10.

Sure. And will we be able to maintain our margins around the 20% to 25%?

No. We brought indications on margins. We have told at EBITDA level, when I see EBITDA, this includes other income component as well. It is safe to take at around 35%. Overall business pulled together, 35%. And at that level, 22% to 23%. I mean that's the broad guidance we have been sharing. And even in this quarter, we are broadly there. In 9 months, we are there.

The next question is from the line of Kunal Sheth from B&K Securities.

Sir, I have 2 questions on the consulting side. So our consulting revenue has been muted for the first 9 months. So while you've held and it was partly because of railway delay in Q2. So if you can give us some sense of how should we look at the consultancy revenue for this year as well as next year?

Yes. There has been some, you can say, some delayed inflows. We have got several orders in consulting. But turning into revenue would be slightly next quarter onwards. Coming back to the current position, I think it's safe to believe that in the remaining quarter or the Q4, the consulting revenue could be in the range of INR 350 crores to INR 400 crores.

INR 350 crores to INR 400 crores.

Or you can say the annual could be around INR 1,100 crores to INR 1,150 crores.

Okay. INR 1,100 crores to INR 1,150 crores. Yes. And sir, next year, what kind of number should we look at for more guarantee as well as consultancy?

The target's at least 10% growth in consulting. And the major projects are coming up. So I think it's safe to believe that 18% revenue is there.

Okay. And sir, you mentioned that 62% of our consultancy segment is railways. Can you give us some sense of, within the consultancy segment, how much in nomination is and how much is competitively bid?

I will rather give you one more insight before I answer your point straight, if you see railway sector consulting, we said about 62%. When I say consulting railways, there's a lot of nonrailway clients. This sector is railways, but the clients could be various power companies, mining companies, steel companies, port connectivity so we work with all of them and put together, this becomes a revenue from railway segment. Now, the question of nomination is from railway, and that turnkey segment is a nomination so far. But now after the December policy, this would still be counted as competition. This is about, say, 25% to 30% of our turnover would be from turnkey. And the remaining, if you see the railway work, 50-50, almost 50%, 60% would be on nomination, balance is on competition.

This is within the consultancy segment, you are saying, right?

Yes. Within the consultancy also. Their projects coming on competition. And in other segments, also, we are getting on competition also, like in the beginning, I talked about one ICP, yes. That's a not a metro -- sorry, and Metro, you get on competition. So almost mix of both the metrics is happening.

Okay. Okay, sir. Sir, and can you help us with the break out the consultancy order book in various segments? Like you helped us last question between metro railway and into airports, highways, buildings.